Analyst Note| Jaime M. Katz, CFA |
No-moat Bed Bath’s first quarter suffered from store closures over most of the period, with only Buybuy Baby and Harmon benefiting from essential retailing status. Net sales from stores fell 77%, around the same store declines of 70% we had forecast. However, e-commerce surged (up 82%), representing two-thirds of sales in the period, tempering total sales declines to 49%, at $1.3 billion. Cost metrics were also impacted by COVID-19’s disruption, with the gross margin falling 780 basis points to 26.7% (below the 28% we expected), as digital costs, lower margin mix, and deleverage of costs hindered expense metrics. We were glad to hear the firm would be undertaking significant store closures (about 200 locations) over the next two years, as we expected about 350 boxes would be shuttered over the next decade. While we plan to change the timing of our store closures in our model, we still believe Bed Bath will either further prune the store base or divest some brands, exacerbating square footage losses. In this vein, we don’t plan any material change to our $11.30 fair value estimate and view shares as modestly undervalued.